Chapter 6

Chapter 6International Transparency and

Disclosure

International Accounting and Multinational Enterprises – Chapter 6 – Radebaugh, Gray, Black

Introduction to Transparency Lack of “transparency” is a major concern in

raising international capital for MNEs Concerns with transparency arose with the

Asian Crisis (97-98), Enron, WorldCom, Parmalat,

Achieving greater transparency is a goal of regulators around the world

Greater transparency can restore confidence in and expand capital markets


Levitt and Greenspan on TransparencyArthur Leavitt- SEC Chair (1998)

“The significance of transparent, timely and reliable financial statements and its importance to investor protection has never been more apparent. The current financial situations in Asia…are stark examples of this new reality. These markets are learning a painful lesson taught many times before: investors panic as a result of unexpected or unquantifiable bad news.”

What does his statement imply – What role to analysts play?

Alan Greenspan – FED Reserve Chair“A major improvement in transparency, including both accounting and public disclosure, is essential.”


The Meaning of Transparency Transparency helps investors distinguish between

good and bad quality firms – using fundamentals to assess strengths / weaknesses

Transparency = widespread availability of relevant / reliable information about financial position, governance, value of public firms

Bushman and Smith transparency- combination firm and country specific factors such as Corporate financial reporting /Governance disclosures Availability of annual reports in English Penetration and ownership of the media Ease of gaining private information on a firm


The Meaning of Transparency PricewaterhouseCoopers’ Opacity (opposite

of transparency) Index at the country level considers Corruption levels Legal and judicial opacity Economic/political opacity Accounting/corporate governance opacity Impact of regulatory opacity and

uncertainty/arbitrariness


The Meaning of Transparency Bushman, Piotrosk and Smith identify two

kinds of corporate transparency at the country level Financial transparency

Corporate disclosure intensity Timeliness of disclosures Number of analysts and media development

Governance transparency – What is governance? Factors include compensation structure / management

motivations


Pressures for Disclosure More demand esp in well developed securities

markets – US, UK, Japan, France, Germany Financial community desires more disclosure Result has been increasing disclosure requirements

UN, OECD, EU, and IASB are issuing more detailed regulations

Globalization increases the need for further disclosure by MNEs

Some groups gain “tailor-made” reports (trade unions, governments etc.)

Trend shows that greater disclosure increases the demand for more information


Communicating to Users The audience determines the range and depth of

information disclosed Many users do not understand the information given

them – specialized training – responsible for inflated market of late 90’s?

Few use annual reports directly – role of investment advisors? Correlation with tax advisors?

MNE reports tend to be more complex than domestic reports – operate in multiple countries but usually report in one – confusing for owners familiar with other countries financial reporting


Communicating to Users and the Importance of Disclosure Simplified reports may omit important information useful to direct

users (experts) Greater disclosure serves experts AND those they serve MNEs are disclosing more information about future prospects

and policies and are using the Internet extensively

As Future-Oriented, MNE SensitivitySpecific Info To Info Provision


Managerial Incentives to Disclose Information Management provides information voluntarily

and because of regulation – selected items?


Costs of Information Production

Benefits > Costs Direct cost of disclosure is made up of

The value of resources used in gathering and processing the information – hiring experts / educating staff

The cost of auditing and communicating the information Indirect costs include

Competitive disadvantage Costs of government interference

Internal and external information needs will always differ – focus of managerial reports v. investor reports.Internal audit v. external audit. What is ERP?


Competitive Disadvantage of Disclosure The more specific or future-oriented the information,

the more potential for competitive disadvantage Competition through disclosure – better

assessment of firm quality or firm struggles –Vodafone recent financial data?

Vigor in the economy – more information with good news / less willingness to report bad news

In business incentives


The Net Costs and Benefits of Disclosure of Specific Items


The Net Costs and Benefits of Specific Disclosure Items


Corporate Disclosure Practices Meek, Roberts, and Gray

MNEs tend to disclose more information voluntarily than domestic corps.

Factors influencing voluntary disclosure are Size / International listing status Country or region of origin / Industry Coordination with what competitors disclose

Non-financial information is a European phenomenon


Corporate Disclosure Practices Cultural values influence disclosure (Gray) Hofstede’s dimensions (e.g. Power distance,

collectivism, uncertainty avoidance etc.) impact disclosure –

Archambault and Archambault (2003) findings Companies disclose more if they are in common law

countries Illiteracy, religion, inflation, market cap., number of foreign

listings, dividends, and using a Big 6 auditor all affect disclosure

Corruption acts as a hindrance to disclosure


International Disclosure Regulation Fourth and Seventh Directives (EU) require

“Fair review of the development of the business” Any “likely future development” Report activities in research and development –

what information does this communicate?


International Disclosure Regulation U.S. - SEC

Requires “management discussion and analysis” This entails results of operations, liquidity and capital

resources, and the impact of inflation Future-oriented information is desirable

U.K. – ASB gives guidance for an “Operating and Financial Review” Similar to U.S.

Disclosures vary due to regulation, size of equity market, capital market expectations, cultural & management attitudes toward secrecy


Corporate Review: Pg. 139-141 Reviews business activities as a whole Includes the following

Chairperson’s Statement Chief executive comments on his role

Review of Corporate Strategy and Results See Unilever and DaimlerChrylser in Exhibits 6.7, 6.8

Comments on External and Unusual Events Includes comments on exchange rates and company fraud

Acquisitions and Disposals Information High disclosure in U.S., U.K.

Human Resources Information Disclosure is high in this area in France, U.S.


Corporate Review Includes the following

Value-Added Information See BMW in Exhibit 6.9

Social Responsibility Information See GlaxoSmithKline in Exhibit 6.10

Research and Development Information Disclosure is high in this area in U.S., U.K., Germany

Investment Program Information Disclosure is high in Australia, NZ, Holland, U.K.

Future Prospects Information Disclosure is high in Germany, Hong Kong, Holland


Operations Review A more detailed review of business

operations is given, including segment info Includes the following

Review of Business Segments Includes quantitative data and narrative commentary

Review of International Operations and Geographical Segments Becoming increasingly important with globalization


Financial Review Includes a discussion and analysis of

financial results and financial position Includes the following

An Analysis of Results Discussion of events and impact on earnings

An Analysis of Liquidity and Capital Resources High disclosure in France, Italy, Holland, U.S., U.K.

An Analysis of Asset Values and Inflation High disclosure in Holland, Sweden, Switzerland, U.K.


Frequency and Timeliness of Reporting Globalization increases the need for more frequent

reporting U.S. and Canada require quarterly reporting

Biannual reports are required if local requirements are used for an MNE

Europe - EU Directive on Interim Reports Requires biannual reports on income and operations Some companies disclosure quarterly (Volvo, ICI)


Frequency and Timeliness of Reporting IASB – IAS 34 – Interim Financial Reporting

Does not provide for frequency of reports, only minimum content of reports

Publication of annual report is usually set at a limit of 6 months from the financial year-end

Why is timeliness so important? In U.S. and Canada: 10Qs as well as 10Ks

Market reaction to quarterly reports International movement to more frequent reports has

been slow. Growing number of MNE voluntarily report unaudited

quarterly reports to meet demands of investors.


Growing Pressures for Transparency Pressures are increasing because of

Cross-border capital raisings Growth of world trade and investment

A lack of transparency exists in emerging economies

Nature of disclosure depends on international and domestic factors and traditions

IASB is working to increase to disclosure, especially in segmental disclosure

Chapter 6

Documents

Transcript of Chapter 6